J. Winternitz

The Marxist Theory of Crisis

Written:
1949First Published: The
Modern Quarterly, 4,4, 1949Source:What
Next JournalTranscription/Markup:
What Next/Steve PalmerProofread:Copyleft: Permission is
granted to copy and/or distribute this document under the terms of the Creative
Commons License.

Academic economic theory has become "crisis conscious". This
is
a new phenomenon, resulting from the shattering experience of the
world economic crisis of 1929-32. From the times of Adam Smith and
Ricardo up to recent times the prevalent opinion among bourgeois
economists was that the "free enterprise" system was
self-regulating, automatically adapting supply and demand, and
crises were just exceptional disturbances like floods and
earthquakes, the explanation of which was not the business of
economists who had proved to their satisfaction that such a thing
as general overproduction could not exist. This attitude was aptly
summed up by Professor Hicks when he wrote in his review of Keynes'
General Theory of Employment: "Ordinary (static)
economic
theory explains to us the working of the economic system in
'normal' conditions. Booms and slumps, however, are deviations from
this norm, and are thus to be explained by some disturbing
cause."1

It is a symptom of the general crisis of capitalism that this
naive faith in the internal harmony of the capitalist system is
shattered in the minds both of practical businessmen and of the
theoreticians of capitalist economy. The fear that the boom in USA
must end sooner or later is as general now as was the belief in
everlasting prosperity in 1929. In the last two decades more
theories of the trade cycle were produced than in the preceding
century, although the periodical alternation of booms and slumps is
as old as industrial capitalism.

But none of the numerous bourgeois theories explains why from
the very conditions of capitalist production periodical crises
arise from necessity. These economists still believe that crises
could be avoided, the swings of the economic pendulum damped, the
irregularities of the cycle ironed out, by some adaptation of the
monetary or credit system, by state intervention, by increased
"elasticity" of wages or by a more equal distribution of incomes
with the help of taxation; shortly, by reforms which would improve
the workings of the capitalist system without touching its basis -
private property in the means of production. The various proposals
for guaranteeing full employment are based on this conviction that
nothing is fundamentally wrong with the economic system.

While for the apologists of capitalism, economic crisis is a
dismal paradox which has not so much to be explained as to be
explained away, for Marx and Engels, the revolutionary critics of
this system, economic crisis was the most obvious, the outstanding
empirical proof of their fundamental ideas, proof of the
irreconcilable, ever sharpening internal contradictions of
capitalism, its growing inability to put to productive use the
tremendous productive forces which have grown up under this system.
In the writings of the founders of scientific socialism, we find
numerous references both to the theoretical explanation of
capitalist crisis and to the revolutionary implications of these
recurring upheavals.

Unfortunately, Marx was not able to complete his great work on
capitalist economy as he had outlined it in his Contribution
to
the Critique of Political Economy in 1859. Therefore we do
not
find an elaborate and systematic presentation of the theory of
crisis in the writings of Marx. But it can be claimed that all the
elements of such a theory are to be found in Capital
and
in the Theorien über den Mehrwert[Theories of
Surplus-Value], posthumously
published by K. Kautsky.2

But as the different aspects of this complicated problem are
treated by Marx in various contexts, his ideas have been
interpreted in different ways by Marxists and it is not easy to
connect the links in one consistent chain of thought.

There are two basic ideas in Marx's analysis:

1. Capitalist crisis is an expression of the underlying basic
contradiction of capitalist society; the social character of
production and the private character of appropriation and
consequently the tendency of boundless, rapid expansion of
production on the one hand, the limitations of consumption on the
other hand.

2. The internal contradictions involved in the tendency of the
rate of profit to fall, find expression in crises.

These two ideas are closely interconnected, they are not two
alternative theories between which we have to choose, they are two
aspects of one clear-cut economic theory.3

A theory of crisis, to be satisfactory, has to explain the
trade
cycle, the regular periodical alternation of booms and slumps, both
the fact that for some time a relative equilibrium, a certain
proportion between the various branches of production, between
supply and demand, is established and the fact that this
equilibrium cannot be maintained and breaks down suddenly and
violently. Therefore neither underconsumption nor the anarchy of
production in itself can be regarded as an explanation of
crisis.

Marx and Engels repudiated a crude, oversimplified theory of
underconsumption.4

Marx points out that "crises are precisely always preceded by
a
period in which wages rise generally" and that this "relative
prosperity" of the working class occurs always only "as a harbinger
of a coming crisis." Engels stresses the point that
underconsumption of the masses, i.e. the limitation of their
consumption to the bare minimum, existed thousands of years before
capitalism emerged, but only with capitalism does the new
phenomenon of over-production emerge. Underconsumption is a chronic
fact in capitalist society while crises recur periodically.

If we take into account that even in modern monopoly
capitalism
with its high concentration of production and capital there are
many thousands of independent productive units, every one producing
for the unpredictable contingencies of a vast market, every one
dependent on the decisions of millions of other private producers
and consumers, and every one directed only by the desire to make
the maximum profit, it is not so astonishing that this absurd
system tends to break down. It is astonishing that it functions
somehow, for some time. The whole process of production, normally a
process of expanding production, can only continue if the mass of
capitalist producers find on the market a sufficient demand to
enable them to sell their product at what they regard as a
reasonable profit and a sufficient supply of the means of
production (machinery, raw materials and labour) and at such prices
as will enable them to reproduce their capital, to continue their
production on an enlarged scale.

Marx (in Volume II of Capital) derived a
formula which
gives the quantitative relations which must obtain between the two
main departments of social production, the production of means of
production and the production of means of consumption, to make
expanded reproduction of capital accumulation possible.

As long as commodities are produced and exchanged in these
proportions production can continue on an ever-enlarged scale.

This equation symbolises in fact numerous quantitative
relations
of this type.

How arc these proportions established and maintained in an
unplanned market economy? By the so-called price-mechanism, the
"law of supply and demand". When there arc deviations from the
socially necessary proportions, the over-produced commodities will
fall in price, the under-produced commodities will rise, an
under-average rate of profit will be realised in the over-expanded
branches, an over-average rate in the under-sized branches, capital
will flow from the first to the second till equilibrium is
restored.

In this way, for some time (to a certain degree), with
continuous deviations and vacillations, a relative equilibrium of
supply and demand can be maintained. Partial
crises of
overproduction, overproduction of some commodities parallel to
underproduction of other commodities, are thus a regular feature of
capitalist economy.

But those economists are mistaken who think they can explain
the
periodical crises from disproportions of this sort.5

The anarchy of production only explains the possibility
of crises, it does not explain their necessity. If we abstract from
the basically dynamic character of capitalist production the rapid
growth of the productivity of labour, it is easy to construct a
model of an expanding capitalist system which would maintain the
equilibrium once established, by increasing working class and
capitalist consumption at the same rate as the increase in capital
and output.

Capitalism is distinguished from all previous systems of
production by the continuous, rapid growth in the productivity of
labour which is reflected in the steady growth of the organic
composition of capital, in the growing mass of "dead labour" put
into motion by living labour.6

Capitalism revealed the tremendous productive forces which -
as
the Communist Manifesto says - "slumbered in the
lap of
social labour". For it is not the ingenuity of the capitalist class
which develops the productivity of labour on an unprecedented
scale. It is the higher stage of integration of social labour, the
development of the division of labour and the assembly and
organisation of thousands of workers in one process of production,
and the application of science to the technique of production,
which achieves these miracles of productivity.

It is the accumulation of capital itself which implies the
constant growth of productivity. It makes the application of
technical improvements possible on a larger scale, and the
concentration of production in itself without technical revolutions
enhances productivity as a growing share of the total is produced
in more efficient large-scale enterprises.

This social character of production, which causes the volume
of
production to rise much more quickly than the numbers of workers
employed in production, conflicts with private appropriation, the
fact that the whole product is appropriated by the private owners
of the means of production for whom the realisation of a maximum
rate of profit is the only motive for production. To achieve this
the capitalist has both to keep down wages and to limit his own
consumption so that the maximum is left for accumulation. Both
these tendencies imply the restriction of the consuming power of
society. So the contradiction results which finds its expression in
general overproduction, the main feature of crisis.

The so-called orthodox economists never even came near to an
explanation of crisis as they refused to recognise the possibility
of general overproduction. They accepted the dogma, first
pronounced by J.B. Say and then adopted by Ricardo, that total
demand always equals total supply, that production creates incomes
equal to the values produced.

The price, according to this theory, consists of the sum of
wages, profits and rent. So total income must be equal to the total
value produced.

This specious argument forgets, first, that the value of a
commodity becomes income only after it has been sold, and while
wages as a rule have to be paid beforehand, profit income arises
only when the product has been sold at profitable prices, secondly
that income is not identical with demand, for a capitalist who has
exchanged his commodities against money is not forced to exchange
his money for commodities. "Say's Law" begs the question by
assuming that commodities produced are commodities sold and it
fails to take into account the fundamental difference between the
function of money as a medium of circulation, serving merely the
interchange of different use-values, and money as the embodiment of
value in a capitalist economy where the realisation of surplus
value, the accumulation of capital, and therefore the appropriation
of more and more money is the only purpose of those who dominate
production.

Marx explains how the dual character of a commodity as
use-value
and value appearing in exchange, involves the possibility
of crisis. The fact that commodities are useful, needed to satisfy
human wants, does not guarantee that they are saleable at prices
corresponding to their values and realising the surplus value which
alone makes production worth while from the point of view of a
capitalist producer.

When the value aspect of commodities finds a separate
embodiment
in money, the "general commodity" which in itself has no use-value,
the same contradiction reappears and reveals the possibility of
crisis. An exchange of commodities, mediated by money, is not
barter. It consists of two separate acts. "If the interval in time
between the two complementary phases of the complete metamorphosis
of a commodity become too great, if the split between the sale and
the purchase become too pronounced, the intimate connection between
them, their oneness, asserts itself by producing a
crisis."7

A theory of the trade cycle has to explain both why production
can expand over a period of time in spite of the underlying
permanent contradiction between the increasing productive power and
the limited consumption capacity, and why this contradiction must
in the end find expression in a violent crisis. The answer to these
interrelated problems lies in the conditions of reproduction of
fixed capital on the one hand, and in the contradictions involved
in the tendency of the rate of profit to fall on the other
hand.

The classical economists, A. Smith and D. Ricardo, regarded a
long-term trend of the rate of profit to fall as a fact proved by
experience, by the continuous fall of the rate of interest from 10
per cent in the middle of the sixteenth to 3-5 per cent at the end
of the eighteenth centuries.8

Marx's theory connects the tendency of the profit rate to fall
with the increasing productivity of labour by means of the increase
in the organic composition of capital. If - using the usual symbols
- we denote the organic composition of the capital c/v by r, the
(annual) rate of surplus-value by s' and the rate of profit by p,
we have:

p =

s

=

s'

c + v

r + 1

If s', the rate of exploitation, remains constant, the rate of
profit must fall as the organic composition of capital (r)
increases with the progress of technique, which implies that more
machinery and raw material is used and used up per worker. But p
will fall, too, if s' is growing at a slower pace than r+1.
Generally speaking, the rise of s' which is a normal feature in
capitalism, is a force counteracting the falling
tendency
of p and may even reverse it - for a time.9 The
other
main counteracting tendency is the depreciation of constant
capital. The same process of increasing productivity which appears
in a higher technical composition of capital (a
bigger
volume of machinery and raw material per worker)
reduces
the value of those commodities of which c consists so that to this
extent the increase of the organic composition is checked.

Discussing the internal contradictions of the law of the
tendency of the rate of profit to fall, Marx says: "These different
influences make themselves felt, now more side by side in space,
now more successively in time. Periodically the conflict of
antagonistic agencies seeks vent in crises."10

The long-term tendency of the rate of profit to fall is
important as one of the causes of the continuous sharpening of the
internal contradictions of capitalist society. For an understanding
of the trade cycle, however, we have to analyse the movement of the
rate of profit during the cycle. For this purpose we have to drop
the assumption (made by Marx when concerned with the long-term
analysis) that prices equal values. The regular deviation of market
prices from values is an essential element of the cyclical
movement.

The general price level and the rate of profit go up in the
phases of revival and boom, they drop suddenly and violently in the
crisis, and depression persists till prices and the rate of profit
begin to rise again.

The cyclical movement of the rate of profit is in a sense the
motive force behind the cycle. For capitalists expand production
when profit prospects are bright and stop expansion or even
contract when profit prospects deteriorate.

Some economists of the subjectivist school solemnly "explain"
the trade cycle by "a rhythmical recurrence of errors of optimism
and pessimism". But even if there are "errors" of judgement, e.g.
over-estimation of the prospects of profits at the end of the boom,
they are not essential. Essential is the fact that for a
considerable time there are good and even growing profits,
justifying "optimism", while, sooner or later, irrespective of the
feelings of the capitalists, the tendency is reversed and a more or
less sudden fall in the rate of profit sets in.11

On the face of it this seems to contradict the Marxist
analysis.
For the upward phase of the cycle is just the time when, with
increasing investments, accumulation of capital and concentration
of production, technical improvements, etc., the organic
composition of capital is growing, the tendency of the rate of
profit to fall is developing. But here one must bear in mind that
the fall in the rate of profit becomes effective only when market
prices go down, corresponding to a general reduction of values.

If by technical progress costs of production are reduced while
prices of finished goods remain stable or are even rising, then
evidently the rate of profit will rise and not fall. And this is
just what normally happens in the upward phase of the cycle.

So just when the value of commodities is falling, prices tend
to
rise. This is not a logical contradiction in the labour theory of
value, but a real contradiction in capitalist economy.

Prices are kept above values as long as demand exceeds supply.
At the end of a depression stocks are at an ebb, the productive
apparatus is run down, necessary replacements have not been made,
there is a low rate of interest, reflecting an abundant supply of
capital looking out for profitable investment. The possibilities of
satisfying this pent-up demand are, however, limited by a
productive capacity reduced in crisis and depression. A substantial
increase in the supply of consumption goods will not begin before a
re-equipment and expansion of industrial plant has been
effected.

This is the basis of the revival in production goods
industries.
Growing employment in the investment goods industries increases
workers' incomes, and so the demand for consumption goods expands
again. This is the way in which one cogwheel drives the other in
the upward phase of the cycle.

Reproduction of fixed capital is concentrated in the upward
phases of the cycle. In crisis and depression hardly any net
investments take place and even replacements are reduced to a
minimum. Marx stresses the connection between this discontinuity in
the reproduction of fixed capital and the trade cycle:

"It is true that the periods in which capital is invested are
different in time and place. But a crisis is always the starting
point of a large amount of new investments. Therefore it also
constitutes, from the point of view of society, more or less of a
new material basis for the next cycle of
turn-over."12

It is easy to understand why the process of expansion, once it
has got under way, is cumulative. It cannot be proved that there is
a constant relation between the amount of net investments and the
growing demand for consumption goods - as the theory of the
multiplier implies13 - but there is no doubt
that an
increase in the production of each of the two main departments
stimulates production in the other department. The problem is why
this process cannot go on without limit, why the boom must end.

The question is then: Why cannot the rate of profit be
maintained? The rate of profit depends on the general level of
prices compared with the cost of production. Both tend to go up in
the upward phase of the cycle. As long as prices arc not forced
down by overproduction, the rate of profit tends to grow because
the increase in the organic composition of capital is
overcompensated by the increase in the rate of surplus value.

Technical improvements are introduced by capitalists only
because they increase their rate of profit. They reduce the cost of
production per unit, which means extra profits - as long as prices
are not reduced to a level corresponding to the reduced value. Marx
stresses this point very clearly:

"No capitalist voluntarily introduces a new method of
production, no matter how much more productive it may be, and how
much it may increase the rate of surplus value, so long as it
reduces the rate of profit. But every new method of production of
this sort cheapens the commodities. Hence the capitalist sells them
originally above their prices of production, or, perhaps, above
their value. He pockets the difference which exists between the
prices of production and the market-prices of the other commodities
produced at higher prices of production. He can do this, because
the average labour time required socially for the production of
these commodities is higher than the labour time required under the
new method of production. His method of production is above the
social average. But competition generalises it and subjects it to
the general law. Then sets in the fall of the rate of profit -
perhaps first in this sphere of production and then levels with the
other spheres - which is, therefore, wholly independent of the will
of the capitalists."14

It might be assumed that extra profits made in this way are
made
at the expense of other sections of the capitalist class and do not
increase the rate of profit for the capitalist class as a whole.
Marx is explicit on this point:

"It might be asked, whether the causes checking the fall of
the
rate of profit, but always hastening it in the last analysis,
include the temporary rise in surplus value above the average
level, which recur now in this, now in that line of production for
the benefit of those individual capitalists who make use of
inventions, etc., before they arc generally introduced. The
question must be answered in the affirmative."15

This is so because wage rates never increase in step with the
growing productivity of labour. Wage costs per unit are reduced or
- this is only another expression of the same fact - the rate of
exploitation grows. In fact, workers frequently have to put up a
stiff fight even to maintain their real wages while living costs
are going up. But even if they succeed in increasing their real
wages which the better organised skilled workers as a rule achieve
when the demand for labour is high in times of prosperity, wages
still lag behind productivity. Those interpreters of Marxist theory
who try to explain the fall in the rate of profit by a fall in the
rate of exploitation, caused by wage increases in a time when the
industrial reserve army is absorbed in production and demand for
labour exceeds supply, are as far away from the facts of modern
capitalism as from the spirit of Marxism.16

It is true that when the general price level rises, the prices
of the elements of constant capital go up too, and this tends to
increase the organic composition of capital and to reduce the rate
of profit. But firstly as far as fixed capital is concerned the
rate of profit is as a rule calculated in relation to the capital
actually invested when the turn-over began, not in relation to what
plant and equipment would be at current prices, and secondly when
raw material prices rise the increased costs are automatically
calculated in the prices of finished goods - as long as goods find
a market at prices of production.

The crisis sets in when at the inflated prices which have been
established during the boom a considerable part of the commodities
produced are not saleable any more, when general overproduction
becomes apparent. As it takes years from the beginning of the large
new investments undertaken in the revival phase of the cycle, to
the full operation of the new plant, when the market is flooded
with consumption goods, there is no gradual adaptation of supply
and demand, of actual market prices and prices of production, but
this adaptation can only be effected by way of periodical
catastrophes as Marx explains:

"As the process of circulation of capital is not a matter of
days, but lasts for a longer period till capital returns to its
starting point, as this period coincides with the period when
market prices are adapted to production prices, as during this
period great revolutions and changes happen on the market, as great
changes take place in the productivity of labour, therefore also in
the real value of commodities, it is very clear that from the
starting point - the presupposed capital - to its return after one
of these periods, big catastrophes are bound to happen and elements
of crises must accumulate and develop."17

The process of adaptation of prices to values or to production
prices follows the pattern of other dialectical processes. There
may be some gradual, continuous adaptation, but this does not solve
the contradictions, the tension is growing till it finds a violent
solution in the sudden slump of the crises.

Overproduction is always overproduction at
certain
prices. The market could absorb all the commodities produced
in the boom period - at lower prices. But at lower prices the
original capital would not be replaced with the usual average
profit.

So capitalists at the peak of a boom are faced with a dilemma.
When they observe that the demand is flagging, they may first
reduce prices and try, at the same time, to reduce their costs of
production. The largest, technically best developed enterprises may
maintain their rate of profit in this way for a time while even
increasing production and conquering a bigger share of the market.
Smaller and weaker enterprises, forced to follow suit, will not be
able to compensate losses in prices by reduction of production
costs. Their rate of profit is falling, they are threatened with
losses.

But when they reduce production, they cannot make full use of
the capacity of their plant, they are not able to reproduce their
capital with the expected profit either.

So with overproduction and the fall of prices the fall of the
rate of profit sets in.

If there were continuous adaptation of prices to value, as
they
are being reduced by growing productivity, and if the nominal
income of the workers and the other productive classes would remain
stable, purchasing power would grow in step with production and no
general overproduction would arise. But then there would be a
continuous fall of the rate of profit, and the capitalists would
lose their incentive to accumulation.

The demand of the working class for consumption goods cannot
offer a sufficient market because it lags behind the growing
productivity of labour.18

Nor does the purchasing power of the lower middle class
increase, if it increases at all, at the same rate as large-scale
industrial production.

They are losing ground in the competition with big capital,
and
can hardly maintain their share of the national income. This holds
true particularly for the peasants. As all real crises are world
market crises, and in the world as a whole the vast majority of the
population are sma11 holders, the importance of this fact - the
poverty of the masses of the agrarian population - is evident. They
share the catastrophe of the slump while they hardly share the
benefits of the boom. Seasonal variations of agricultural income,
at its lowest before the harvest, may explain the fact that most of
the crises begin in either autumn or spring.19

The essential question, however, is whether capitalist income,
the growing sum of profits, interests, and rents, can compensate
the relative decrease of mass demand. This would be so if profits
were used mainly for the individual consumption of capitalists, if
personal luxury were the purpose of capitalist economy. But
capitalist reality is not like that.

Capitalists "save" part of their profits for investment, not
because their "propensity to consume" is lacking, but because their
power as capitalists, their chance of continuing their profitable
business, their ability to stand up against competitors, depends on
the amount of capital they command. Therefore accumulation of
capital, not maximisation of luxury consumption, is the driving
force of capitalist production.

In this way both workers' and capitalists' demand for
consumption goods tends to lag behind growing production. Therefore
Marx in developing the contradiction between production and
consumption stresses not only the reduction of the consumption of
the great mass of the population "to a variable minimum within more
or less narrow limits", but also the restriction of consuming power
"by the tendency to accumulate, the greed for an expansion of
capital and a production of surplus value on an enlarged
scale".20

Keynes in his General Theory propounds
the idea that
deficiency of demand is the basic cause of mass unemployment, but
he fails to take into account the dependence of demand for
investment goods on demand for consumption goods. This is his
criticism of underconsumption theories:

"Practically I only differ from these schools of thought in
thinking that they may lay a little too much emphasis on increased
consumption at a time when there is still much social advantage to
be obtained from increased investment. Theoretically, however, they
are open to the criticism of neglecting the fact that there are
two ways to expand output" (loc. cit., p.825).

"Theoretically", there are no limits either to increasing the
means of consumption (as human needs grow with the means to satisfy
them) or to increasing investments, i.e. improving and expanding
the means of production. In a capitalist society, however,
investments are limited just by the limitation in the amount of
consumption goods which can be profitably sold. Keynes' criticism
amounts to this:

If there is overproduction of textiles, let us make more
spindles; if not enough cars, locomotives and other useful things
made of steel can be sold, let us produce more steel and build new
furnaces! It is the essence of commodities that they must have also
use value to have an exchange value and the use value of investment
goods is to help to produce consumption goods, a simple truth which
is forgotten also by practical capitalists as long as prosperity
prevails.

When the crisis begins, the fall in production is more marked
in
investment goods than in consumption goods. If demand for
consumption goods only remains stable after having steadily grown
for some time, consumption goods production could be maintained at
that level for some time. But demand for production goods would be
instantly cut down to the necessities of simple
reproduction.21

This explains why overproduction may appear first in a
striking
way in production goods. Nevertheless, it is evident that the real
starting point of the crisis must always be in deficient demand for
consumption goods.22

If we remember that throughout the upward phase of the cycle
productivity of labour is growing, the sudden and violent fall of
prices, characteristic of crisis, is understood as a violent
adaptation of the level of market prices to the level of
value.23

This is what Marx has in mind when he says the law of value
regulating exchange relations of products according to the labour
time socially necessary for their production "asserts itself like
an overriding law of nature. The law of gravity thus asserts itself
when a house falls about our ears".25

For a clear understanding of the connection between
overproduction and the fall of the rate of profit we have to
distinguish between the cyclical up and down movement and the long
term tendency. Marx explains the latter by a permanent feature of
capitalist accumulation - the increase in the organic composition
of capital:

"If Smith explains the fall of the rate of profit by
superabundance of capital, accumulation of capital, then this is
regarded as a permanent effect, and this is wrong. However,
transitory superabundance of capital, overproduction, crisis, this
is another matter. There are no permanent crises."26

This is not in contradiction to what Marx says in another
context: "Overproduction produces & permanent
fall of
profit, but it [i.e. overproduction - J.W.] is permanently
periodical. It is followed by underproduction,
etc.
Overproduction follows from the fact that the average mass of the
people can never consume more than the average mass of means of
consumption, that their consumption does not grow correspondingly
with the productivity of labour."27

In capitalism there is a permanent
tendency both to
overproduction and to the fall of the rate of profit. But neither
of these tendencies is permanently in evidence; they assert
themselves periodically in crises. The tendency to a fall in the
rate of profit develops during prosperity, but asserts itself in
the crisis. The counteracting tendencies come into play again in
crisis and depression when prices of raw materials and wages reach
their lowest level, existing fixed capital is depreciated and new
conditions for profitable investments are thus created.

The depreciation of the elements of constant capital has a
contradictory effect: it intensifies the crisis, but it also helps
to solve the contradiction which finds expression in crisis.

When a general fall of prices sets in this also cheapens the
elements of constant capital. But this is no help to the
capitalists, who have to assess their rate of profit by comparing
sales proceeds with the capital they have invested before and not
with the capital they would need now for renewing their equipment
and stocks of raw material. Therefore the reproduction of capital
at a new level of technical development and at prices which
correspond to this new level is connected with those numerous
bankruptcies which arc characteristic of crises.

The crises of the twentieth century have been aggravated by
the
fact that the power of monopoly capitalism is particularly strong
in some of the basic raw materials, like iron and steel. When in a
general slump of prices the prices of these essential elements of
constant capital follow late and slowly in the downward movement,
crises become more violent and depressions are prolonged. The
adaptation of price levels to the needs of reproduction of capital
is delayed by monopoly prices.

"The world market crises", Marx sums up, "have to be
understood
as the real condensation and violent solution of all contradictions
of bourgeois economy."28

For the explanation of crisis it is obviously not essential
that
the rate of profit should actually fall from cycle to cycle; Marx
was not dogmatic about this thesis. He says:

"The law therefore shows itself only as a tendency, whose
effects become clearly marked only under certain conditions and in
the course of long periods."29

The slackening of accumulation in highly developed industrial
countries, the growing pressure to export capital to backward
countries, where the rate of profit is higher, seem sufficient
empirical evidence that the tendency asserts itself in the long
run. For the theory of crisis, however, the conflict of
counteracting causes is essential. The capitalists, fighting
against the tendency by pressure on wages, by reducing costs of
production with the help of technical improvements, by the struggle
for new markets, are intensifying those contradictions which land
the whole system in crises.

The Marxist theory makes it clear beyond doubt that there will
be crises as long as capitalism exists and that crises tend to
become deeper and more violent as the basic contradictions of
capitalist production grew.

The progress of technique, the growth of the productivity of
labour, which is the necessary precondition of an improvement of
the living standard of the people, of progress to a higher level of
civilisation, becomes, under the contradictory conditions of the
capitalist system, a curse, a cause of permanent economic
insecurity, of mass unemployment and recurring crises.

The cure of the evil is not to stop or to retard the
development
of productive forces, but so to change the basis of economic life
that the satisfaction of the needs of the people, instead of
capitalist profit, becomes the driving and regulating
principle.

Footnotes

1. Economic Journal, June 1936, p.239.

2. These four volumes of contributions to a critical history
of
economic thought are of inestimable value to every serious student
of economics. Vol.II, Part 2, contains a long chapter on
"Accumulation of Capital and Crisis". I learn that a shortened
English edition is being prepared by Lawrence and Wishart.

3. The American Marxist, Paul M. Sweezy, in his interesting
The Theory of Capitalist Development (Dennis
Dobson), goes
so far as to distinguish between two kinds of crises: those
associated with the falling rate of profit and those arising from
underconsumption, pp.l45ff.

5. The ex-Marxist, K. Kautsky, asserted solemnly that nil
crises
could have been avoided if only capitalists had studied and applied
the reproduction schemes of Marx (in his Preface to the German
popular edition of Volume II of Capital. The
reformist
illusion that the development of monopolies would lead to an
"organised capitalism" without crises (Bernstein, Hilferding) was
based on the same mistake.

6. i.e. Machinery (embodying labour) put into motion by
man-power. The proportion of constant capital to
total
capital is growing larger.

7. Capital, Vol.I, pp.87ff. Marx devotes
a long,
detailed argument to a devastating criticism of Say's dogma in
Theorien über den Mehrwert, in the Second Part of
Vol. II, pp.274ff. J.A. Hobson's critique of Say's Law
(Evolution of Modern Capitalism, pp.288ff) was
obviously
written without knowledge of Marx's penetrating analysis.
J.M. Keynes knew somehow that Marx did not accept the
demand-equals-supply dogma, but his abysmal ignorance of Marx's
economic theory finds expression in his slighting reference to "the
underworlds of Karl Marx, Silvio Gesell or Major Douglas" (The
General Theory of Employment, p.32).

8. The Wealth of Nations, Book I,
Chap.IX.

9. J. Robinson is puzzled by Marx's "drastic inconsistency"
which she finds in his demonstration of the tendential fall of p
under the assumption of a constant s' while the argument of Vol.I
of Capital implies a tendency of s' to grow with
the
growing productivity of labour. (An Essay on Marxian
Economics, pp.42ff.) The conflict of these counteracting
tendencies is expressly dealt with in Capital,
Vol.III,
Chaps.14-15. But as dialectics is a terra incognita for Mrs
Robinson, she fails to understand that there is no "inconsistency",
but a contradiction in reality reflected in Marx's theory. Also
N. Moszkowska in Das Marx'sche System (Berlin,
1929)
grossly misinterprets Marx when she tries to prove that either p
falls with constant s' or s' rises with constant p (p.118).

10. Capital, Vol.III, Chap.15, p.292.

11. In his "Notes on the Trade Cycle" (General Theory,
Chap.22), Keynes also stresses the psychological element very
strongly. "When disillusion falls upon an over-optimistic and
over-bought market, it should fall with sudden and even
catastrophic force" (p.316). What he calls "the marginal efficiency
of capital", though defined with his usual ambiguity and confusion,
is roughly the expected rate of profit. About revival he says: "It
is not so easy to revive the marginal efficiency of capita],
determined, as it is, by the uncontrollable and disobedient
psychology of the business world" (p.817). But he hints at least at
the objective facts which determine the changing
moods of
the "business world": "The disillusion comes because doubts
suddenly arise concerning the reliability of the prospective yield,
perhaps [!] because the current yield shows signs of falling
off."

12. Capital, Vol.II, p.211.

13. The contradictions in which the Keynesians get involved
with
their attempts to use the theory of the multiplier as an element of
a theory of the cycle were well exposed by G. Haberler in his book,
Prosperity and Depression, 3rd edition, Chap.13.

14. Capital, Vol.III, Chap.15, pp.310f.
I have adapted
Untermann's translation more closely to the original.

15. Capital, Vol.III, Chap.14, p.274.

16. Sweezy and Moszkowska (in their books quoted above) fall
into this trap misled by an argument of Marx (in Capital,
Vol.III, Chap.15, p.205), where he discusses the possibility of a
crisis arising when an increased capital would not find any
exploitable labour. But he stresses more than once the great
difference between pointing out diverse possibilities of crises and
finding the law of the regular reproduction of crises. See also
Capital, Vol.III, p.281: "Nothing is more absurd,
than to
explain a fall in the rate of profit by a rise in the rate of
wages", although there may be exceptional cases where this may
apply. Marx proved in Capital, Vol.I, Chap.25,
that as a
rule the working population increases more rapidly than the means
of employment on account of the growth in the organic composition
of capital. He discusses the problems arising from a shortage of
labour with reference to England in the fifteenth and during the
first half of the eighteenth centuries.

17. Theorien über den Mehrwert, II, 2,
p.207.

18. This is a common experience which will be confirmed by
every
trade unionist. There are, however, questionable statistics which
try to prove the contrary. E.g. Professor L. Robbins (The
Great
Depression, p.211) compiled an index of consumers' goods
production which - from 1924 to 1929 - rose only by 7 per cent,
while wage income rose by 12 per cent. But he takes into account
only textiles, leather, and food, while the biggest increase was in
durable consumers' goods. Motor-car production which played a
leading part in this boom increased by 79 per cent, textiles by 33
per cent, tobacco by 43 per cent. The general index of production
was up by 83 per cent.

19. Beveridge, Full Employment, p.803.

20. Capital, Vol.III, Chap.15, pp.286ff.

21. This is an application of the so-called "acceleration
principle". For literature on this principle see Haberler,
loc. cit., p.87.

22. Throughout the nineteenth century railways played a
leading
part in the industrial cycle; after 1900 the electrical industry,
mainly in Germany and USA, played a similar part. In Britain
textiles used to be ahead of other industries. (Beveridge in the
Economic Journal, 1939, pp.52ff.) In the 1929
crisis in
the USA over-production emerged first in motor cars and other
durable consumers' goods.

23. This explains why there was a violent crisis with a big
slump of prices in the USA in 1929 although there was no preceding
"inflationary" rise of the price level. The increase of
productivity by 25 per cent corresponds to a fall in values by 20
per cent. But prices fell only by 10 per cent. It is the relation
of prices to values that counts.

24. Capital, Vol.III, Chap.XXX, p.577.
There is a small
element of truth in the idea, current among modern economists, that
there is an alternation of "inflation" and "deflation" in the trade
cycle. This, however, is no explanation of the cycle, but just one
of its aspects.

25. Capital, Vol.I, p.40 (Allen and
Unwin edition). It
is evident that Marx refers here to crisis. In a note he quotes
Engels: "What are we to think of a law that asserts itself only by
periodical revolutions?" This idea is also most forcefully
expressed in "Wage-Labour and Capital", Marx, Selected
Works, Vol.I, p.201.